I have owned my house since 2006. My employer reduced my salary by 30% and now I have to move out of state where I have found a new job. The house is a problem. Since 2006 my house price has dropped by about $40,000. That means I have a $40,000 deficiency, which I don't want to pay. I have option to rent the house, but I am still considering a short sale. Any advice? -Sergio
Hey there, Sergio. To answer your question, I would attempt a short sale. Depending on your situation and the type of loan you have, more than likely you will not have a deficiency. I can give you a better answer after I get more information from you.
I wouldn't recommend renting the house. How hard is it going to be to manage when you are out of state? What if the tenants stop paying? What if a pipe breaks and floods the house? I'm not saying don't rent the house. I just know from past experience that managing rental property from a distance is super tough. I knew a real estate investor who targeted what he called, "tired out-of-town landlords." He would offer to buy their property below market.
Surprisingly, many of them accepted his low-ball offers because they were so tired of dealing with the property. Here is the other downside on renting: you will probably have negative cash flow every month. I don't know what your house will rent for, but if you are upside down on your house value then you are likely also upside down on the rental value. That means you will almost certainly lose money on the rent every month. With your precarious financial situation, a recent 30 percent salary cut, and a move out of state,
the last thing you need is another bill each month.
With a short sale, you can walk away owing nothing and without tax liability while being eligible to buy another house in three years. That sounds a lot better to me than being stuck with a money losing house two years from now.
What a relief! You can now short sale your home and not feel like a loser. In fact, it's becoming the "cool" thing to do. I recently read an article about how Medicare was costing way more than the government had projected it would cost. The article stated that there were several stages of how these programs work.
First, people who are eligible have to be told about the program. They join and the program might meet close to its projected costs. Then, all the people eligible for the program join. After a little while people who aren't eligible for the program feel like suckers for not getting the free benefits. They jump in. The program starts to cost more than originally projected.
Politicians see the popularity of the program and expand the eligibility. Even more people jump on board. Something similar is happening in short sales and loan modifications. The sucker stage has kicked in. It's now considered a smart financial decision to short sale your house. No one is ashamed of it anymore. I don't think they should be ashamed. After all, the American Taxpayers are the ones who bailed out the banks. We are the ones bailing out Fannie Mae and Freddie Mac. Unfortunately, each of us will pay a bunch of money into those failed entities, whether we want to or not. We might as well get some of our money back.
A good short sale agent can help you avoid owing thousands of dollars in the future. Why? The most banks lose money when they reject a short sale. They turn down a sales price of $200,000. They foreclose on the home and put it up for sale. However, they are not able to get the price they want. The home ends up selling for $150,000. What does that mean to you?
First, you probably owe them a lot of money. They may have been losing money on the original short sale. But, now they lost another $50,000. They will probably ask you to repay them for their loss. Many people are shocked to learn that they are stuck owing tens of thousands of dollars to their bank. A short sale can help reduce the amount you owe. I'll explain how.
First, most short sales result in the bank forgiving you on the debt. We have seen banks lose hundreds of thousands of dollars and still forgive the debt. I estimate that over 80 percent of short sales result in the homeowner result in the debt being forgiven. Contrast this with a foreclosure. In most cases, the bank can chase you down for the money for seven to 20 years.
Here is the second way that a short sale can reduce the amount you owe. Most short sales result in the bank result in reduced losses to the bank. I'm sure you are wondering why. First off, the home usually sells for more money as a short sale than it would as a foreclosure. We have seen $385,000 short sale offers get turned down, only to result in the home selling after foreclosure for $230,000. That's a huge loss. Second, a short sale costs the bank less money in property taxes, homeowner's insurance, lost interest income, etc. Overall, the costs are much less. All these costs add up fast.
Most agents complain about how short sales drag out for months at a time. Another agent once told me, "I hate short sales. They take 9-12 months to complete. The banks never call you back to let you know what is happening." The real problem is that most home buyers will wait for 45-60 days for an answer on a short sale offer. After that, then they become impatient.
Here are four simple steps we can use to get your short sale approved in 90 days. If we miss any of these steps, then you risk waiting 6-9 months for an answer on the short sale.
Step 1: Find out the type of loan it is. Examples are Fannie Mae, Freddie Mac, FHA, VA, Portfolio, and "Sliced and Diced."
Step 2: Influence the BPO. The BPO is the bank's version of an appraisal. They use that property valuation to make a decision to approve or deny a short sale offer. Many BPOs are inaccurate. As a result, many short sales are unnecessarily rejected. The banks lose even more money when they property sells later on.
Step 3: Find out what the BPO value is. Ask the negotiator for that info. They are required to send you a copy of the FHA appraisal (if the short sale loan is an FHA loan.) You can get a copy of the VA appraisal (short sale on a VA loan) from one of the VA Loan Centers.
Step 4: Use that information and knowledge of the loan owner's short sale guidelines to force the lender to approve the short sale.
Note: If the buyer's offer meets the loan owner's short sale guidelines, then it should be approved as is. No being wishy washy and wasting people's time.
Short sales are closing all over the place. We can remember one instance where a seller had a job transfer out of state. They were short selling an FHA loan with a second mortgage. The short sale was fairly simple because FHA's short sale guidelines.
Here was how the seller benefited from the short sale:
Benefit #1: The seller was able to walk away with the debt wiped out completely. The FHA short sale guidelines released them from the first mortgage debt. The second mortgage also gave them a complete release. At first, they weren't willing to do that. But we offered them a little extra money in return for a complete release. Fortunately, they agreed to it. This meant that the seller was able to completely wipe out a total of $80,000 in upside down debt.
Benefit #2: Limited Tax Consequences. The seller will only owe taxes on approximately $30,000 of the loss. Why? Because that was around how much money was borrowed on a home equity line. The Mortgage Debt Relief Act of 2007 states that you will not owe taxes on a loss if you used that money to purchase or remodel your home.
However, if you borrowed and used the money for something else, then you would owe taxes on the loss. You would owe the money whether you short sold, or the lender foreclosed. This is only my opinion after reading the law. I recommend that you talk to a competent tax professional before making any financial decision.
Benefit #3: The will be eligible to buy another home in two years. Current Fannie Mae Rules allow homeowners to buy another home two years after a short sale. Compare that with the 5-7 year wait after a foreclosure.
Benefit #4: The sellers paid no money for the short sale. Everything was paid for by the lender. The short sale lender paid the real estate agent, title company, and all the other fees. They can look forward to getting their financial life back on track.
To anyone selling a home, we recommend you ask the buyer to write a letter about why they want to purchase the home. If you are a buyer, then write that letter. The listing agent will submit that letter along with the short sale paperwork. With a little luck that letter will help “grease the wheels” and cause the short sale to be approved faster.Short Sale negotiators are human beings.
They have emotions that can be touched by a good story. These letters might sound like a joke, but they can make a huge difference. I've even seen home owners lose money on their sale because the liked a certain buyer over another one. In that case, the seller sold their home for several thousand dollars less to a buyer that they liked. The other buyer had been rude and the seller didn’t like them.If that made a difference when the seller was losing their own money, then think about the difference it will make to a short sale negotiator who isn’t losing their own money.
Put a good story in your letter. Here are a few examples.You might say something like this:
“We are a first time home buyer looking for our first home. We just want to move out of our cramped apartment and are looking forward to our first home where we can plant a garden.” Or, maybe it would be like this: “We have looked for a while and finally found this home on Elm Street that we love. We are selling our current home so we can buy a house with a yard. Our two boys, Tim and Julian, have been begging us for a swing set. We never had room in our old condo. If you approve our short sale offer, then we will finally be able to give them the large, fenced backyard they’ve always wanted with a swing set. We’ve already picked out the swing set plan and Tim and Julian are so excited about it. So, don’t approve the short sale offer for us
, approve it for them
See how I’m pulling the negotiator’s heartstrings. Unless your short sale negotiator is absolutely heartless, it will make a difference for you. If you're thinking about a short sale, I can help you short sale your property and get back on your feet. Send me an e-mail at Ashish@EastLionInc.com
. I will contact you for a free consultation.
When we talk, I will explain how the process works in detail and answer any questions you may have. Or, if you prefer, you can call me at (818) 259-3455. You can also discover how other sellers successfully completed a short sale and request a free consultation by going to the East Lion Realty & Mortgage Facebook page
Ashish Trivedi is a Real Estate Agent at East Lion Realty & Mortgage. To contact him, his phone number is (818) 259-3455. He is also available though email: Ashish@EastLionInc.com. His homes can be viewed at the East Lion Realty & Mortgage website
. Ashish specializes in loan modification assistance and short sales in Southern California. Copyright 2011 SFI Marketing Institute, LLC. All Rights Reserved.
Many home buyers think that the short sale lender is in charge during a short sale. Nothing could be further from the truth. The short sale lender can only veto short sale offers. They can’t put the property up for sale or decide who to sell it to. Only the home owner can do that. Why is that?
Until the lender forecloses on the home, the homeowner is in the driver’s seat. They “own” the property until the lender forecloses. We have had many buyers get angry that a home owner would not accept their low-ball offer. “You have to submit my offer to the lender. If you don’t then that would be fraud,” they tell the home owner.
You, the home owner are in charge. That means that you can make the following decisions.
You are allowed to pick the buyer’s offer that you think the lender will be most likely to accept.
You are allowed to turn down offers that you don’t like for whatever reason. (Maybe the buyers are too picky about the home and want you to make repairs.)
You are allowed to turn down offers if the buyer is not pre-approved for a loan. In addition, you can ask the buyer to inspect the property before they write a contract.
You are allowed to ask for an earnest money deposit to make sure the buyer is serious about the house.
It is your right to do these things for as long as you own the property. Don’t let anyone tell you otherwise.
My property is in rough shape and needs work. Can I still do a Short Sale? Signed, Dan
You're in luck, Dan. You can still do a short sale. It's a fact that lenders are more motivated to do a short sale on a property that needs repairs than on a property that doesn’t. Most lenders understand that the risk of loss goes up when they foreclose on a property that needs lots of work. Here is an easy way to get a discount approved for a short sale.
Show your lender that a lot of repair work is needed to bring the property back up to a marketable condition so it can be sold. Lenders are simply not set up to get any repair work done. They are in the loan business, not the repair or handyman business. It really doesn’t matter the type of house or condition, all mortgages can be discounted.
The very best types of properties to perform short sales on are houses that are in rough shape and need repair work because the bank will often allow a bigger discount for it. If you have a property that is in rough shape and needs work, do not leave it to be foreclosed. We are here to help. Just send Ashish a friendly email or contact him through our website or Facebook page.
We have seen many instances where a short sale that should have been approved was denied. If your short sale realtor doesn't know what they are doing, then you might get stuck with a promissory note that you don't deserve.
Here is a good example of this happening. A real estate agent had a short sale with one of the largest lenders in America. The short sale negotiator said that they would not approve the short sale unless the seller came to closing with 50k cash. The sellers said no way.
Fortunately, the agent knew that Fannie Mae owned their loan. The good news for the seller is that Fannie Mae does not ask for promissory notes or pursue deficiencies. (There are a couple exceptions, but they didn't apply here.) If those are Fannie Mae's Guidelines, then why would the short sale negotiator require the seller to bring 50k to closing?
Turns out the negotiator was not following Fannie Mae's Short Sale Guidelines. The agent contacted Fannie Mae directly. Within 72 hours a supervisor called from the short sale department. This time they were singing a different tune.
The sale was approved and the promissory note waived. The seller got to walk away owing zero. Why do things like these happen? Because, in our opinion, there is little oversight over the short sale process. Nothing happens when a short sale gets rejected and sells for less as a bank owned property. No, don't kid yourself, this happens a lot.
These short sale negotiators develop an adversarial mindset. They probably even get paid bonuses based on how much money they squeeze out of short sale sellers. This causes their ego to get in the way of what is best for the owner of the loan. If you are thinking about short selling your home, make sure your agent knows how to research who the owner of your loan is. That info will allow them to negotiate from a position of power. And it will help you avoid a deficiency or promissory note.